Documents reveal AT&T, Verizon, others, thought
about dropping employer-sponsored benefits
By Shawn
Tully, senior editor at largeMay 6, 2010:
11:52 AM ET - CNN
(Fortune) -- The great mystery surrounding the historic health care bill is
how the corporations that provide coverage for most Americans -- coverage they
know and prize -- will react to the new law's radically different regime of
subsidies, penalties, and taxes. Now, we're getting a remarkable inside look at
the options AT&T, Deere, and other big companies are weighing to deal with
the new legislation.
Internal documents recently reviewed by Fortune,
originally requested by Congress, show what the bill's critics
predicted, and what its champions dreaded: many large companies are
examining a course that was heretofore unthinkable, dumping the health care
coverage they provide to their workers in exchange for paying penalty fees to
the government.
That would dismantle the employer-based system that has reigned since World
War II. It would also seem to contradict President Obama's statements that
Americans who like their current plans could keep them. And as we'll see, it
would hugely magnify the projected costs for the bill, which controls deficits
only by assuming that America's employers would remain the backbone of the
nation's health care system.
Hence, health-care reform risks becoming a victim of unintended consequences.
Amazingly, the corporate documents that prove this point became public because
of a different set of unintended consequences: they told a story far different
than the one the politicians who demanded them expected.
Why the write-downs happened but the hearings didn't
In the days after President Obama signed the bill
on March 24, a number of companies announced big write downs due to some fiscal
changes it ushered in. The legislation eliminated a company's right to deduct
the federal retiree drug-benefit subsidy from their corporate taxes. That
reduced projected revenue. As a result, AT&T (T,
Fortune
500) and Verizon (VZ,
Fortune
500) took well-publicized charges
of around $1 billion.
The announcements greatly annoyed Representative Henry Waxman, who accused
the companies of using the big numbers to exaggerate health care reform's burden
on employers. Waxman, chairman of the House Energy and Commerce Committee,
demanded that they turn over their confidential memos, and summoned their top
executives for hearings.
But Waxman didn't simply request documents related to the write down issue.
He wanted every document the companies created that discussed what the bill
would do to their most uncontrollable expense: healthcare costs.
The request yielded 1,100 pages of documents from
four major employers: AT&T, Verizon, Caterpillar and Deere (DE,
Fortune
500). No sooner did the Democrats on the Energy Committee read them than
they abruptly cancelled the hearings. On April 14, the Committee's majority
staff issued a memo stating that the write downs were "proper and in accordance
with SEC rules." The committee also stated that the memos took a generally sunny
view of the new legislation. The documents, said the Democrats' memo, show that
"the overall impact of health reform on large employers could be
beneficial."
Nowhere in the five-page report did the majority staff mention that not one, but
all four companies, were weighing the costs and benefits of dropping their
coverage.
AT&T produced a PowerPoint slide entitled "Medical Cost Versus No Coverage
Penalty." A document prepared for Verizon by consulting firm Hewitt Resources
stated, "Even though the proposed assessments [on companies that do not provide
health care] are material, they are modest when compared to the average cost of
health care," and that to avoid costs and regulations, "employers may consider
exiting the health care market and send employees to the Exchanges." (Under the
new bill, employees who lose their coverage will purchase health care through
state-run exchanges.)
Kenneth Huhn, vice president of labor relations at
Deere, said in an internal email that his company should look at the
alternatives to providing health benefits, which "would amount to denying
coverage and just paying the penalty," and that he felt he already had the
ability to make this change under his company's labor agreement. Caterpillar felt it would have to give "serious consideration" to
the penalty option.
It's these analyses -- which show it's a lot cheaper to "pay" than to "play"
-- that threaten to overthrow the traditional architecture of health care.
The cost side
Indeed, companies are far more likely to cease providing coverage if they
predict the bill will lift rather than flatten the cost curve. Deere, for
example said, "We do expect double digit health care increases as most Americans
will now have insurance and providers try to absorb the 15% uninsured into a
practice."
Both Caterpillar (CAT,
Fortune
500) and Verizon believe the requirement to allow dependents to remain on
their parents' policies until age 26 will prove costly. Caterpillar puts the
added expense at $20 million a year.
How two new taxes and the employer penalty change the health care
calculus
First, there is the "Cadillac Tax" on expensive plans. This is a 40% excise
tax on policies that cost over $8,500 for an individual or $23,000 for a family.
Verizon's document predicts the tax will cost its employees $255 million a year
when it starts in 2018, and rise sharply from there. Hewitt also isn't sure that
Verizon can pass on the full tax to its employees; so it could impose a heavy
weight on the company as well. "Many [have] characterized this tax as a
pass-through to the consumer," says the Verizon document. "However, there will
be significant legal and bargaining risks to overcome for this to be the case
for Verizon."
In a statement to Fortune, Verizon said it is not, "considering or even
contemplating" the plans laid out in the report, though records show the company
did send the report to its board shortly after the reform plan was passed by
Congress.
Second, the bill imposes new taxes on drug manufacturers, medical
device-makers, and health insurance providers. Hewitt leaves little doubt
Verizon will be paying for them: "These provisions are fees or excise taxes that
will be shifted to employers through increased fees and rates."
Caterpillar and AT&T actually spell out the cost differences: Caterpillar
did its estimate in November, when the most likely legislation would have
imposed an 8% payroll tax on companies that do not provide coverage. Even with
that immense penalty, Caterpillar stated that it could shave $25 million a year,
or almost 10% from its bill. Now, because the $2,000 is far lower than 8%, it
could reduce its bill by over 70%, by Fortune's estimate. Caterpillar did not
respond to a request for comment.
AT&T revealed that it spends $2.4 billion a year on coverage for its
almost 300,000 active employees, a number that would fall to $600 million if
AT&T stopped providing health care coverage and paid the penalty option
instead. AT&T declined comment.
So what happens to the employees who get dropped?
And why didn't these big employers drop employee coverage a long time ago?
The Congressional Budget Office, in its crucial cost estimates of the bill,
projected that company plans will cover more employees ten years from now than
today. The reason the bill doesn't add to the deficit, the CBO states, is that
fewer than 25 million Americans will be collecting the subsidies the bill
mandates in 2020.
Those subsidies are indeed big: families of four earning between $22,000 and
$88,000 would pay between 2% and 9.5% of their incomes on premiums; the federal
government would pay the rest. So policies for a family making $66,000 would
cost them just $5,300 a year with the government picking up the difference: more
than $10,000 by most estimates.
As bean counters know, that's not a bad deal for a company's rank-and-file,
and it's a great deal for the companies themselves. In a competitive labor
market, the employers that shed their plans will need to give their employees a
big raise, and those raises could be higher, even after taxes, than the premiums
the employees will pay in the exchanges.
What does it mean for health care reform if the
employer-sponsored regime collapses? By Fortune's reckoning, each person who's
dropped would cost the government an average of around $2,100 after deducting
the extra taxes collected on their additional pay. So if 50% of people covered
by company plans get dumped, federal health care costs will rise by $160 billion
a year in 2016, in addition to the $93 billion in subsidies already forecast by
the CBO. Of course, as we've seen throughout the health care reform process,
it's impossible to know for certain what the unintended consequences of these
actions will be.